“How do RINs work and who profits?” Those were the questions Sandra Dunphy attempted to answer at the Southern New England Energy Conference, September 25. It’s a tall order for anyone, because the Renewable Identification Number (RIN) market is notoriously murky, and the policy underlying it, the Renewable Fuel Standard (RFS), famously intricate. Nevertheless, if there’s anyone who can make sense of all this, it’s Dunphy, who has spent the last eight years as Director of Energy Compliance Services at the national CPA firm Weaver and whose widely recognized expertise in RIN trading has earned her the nickname “RINderella.”

Here, we will share some key takeaways from the presentation in hopes of providing at least a basic understanding of the RIN market. Please note this article is by no means comprehensive. To learn more, visit epa.gov/renewable-fuel-standard-program and speak with a professional RIN consultant.

Renewable Fuels By D-Code

According to the RFS, a renewable fuel is one that is produced from renewable biomass; used to replace or reduce a quantity of fossil fuel in a transportation fuel, heating oil, or jet fuel; and has lifecycle greenhouse gas (GHG) emissions that are at least 20% less than baseline lifecycle GHG emissions, unless the fuel is exempt from this requirement.

Although there exists a common misconception that oil companies generate RINs, in fact, it’s the renewable producers that generate RINs. RIN generation occurs before blending, at the production stage. RINs are then passed down through the supply chain until they are retired by oil refiners when they use them for compliance. A different quantity of RINs is assigned to the renewable fuel depending on the fuel category and its corresponding “D-Code.” These D-Codes, which carry different values in the market, are as follows:

D4 = Biomass-based diesel (biodiesel or renewable diesel)

D3 = Cellulosic biofuel

D6 = Corn starch ethanol and other “grandfathered” fuels

D7 = Cellulosic diesel

D5 = All other advanced biofuels.

Heating oil and diesel sellers should note: almost all biodiesel production generates 1.5 D4 RINs per gallon; renewable diesel, which must be used as a replacement for diesel or heating oil, generates 1.1–1.7 D4 or D5 RINs per gallon; and cellulosic diesel generates 1.0–1.7 D7 RINs per gallon. For reference, corn ethanol provides the basis of comparison as it generates 1.0 D6 RINs per gallon.

When looking at RIN value before a biofuel purchase or sale, it is important not to mistake RIN pricing for the biodiesel tax credit (BTC). Whereas the BTC is allotted on a $1-per-gallon basis, RINs are priced like any commodity and traded on a per-RIN basis, not a per-gallon basis. So, for example, to determine the RIN value of a gallon of B100 biodiesel, one would multiply the current D4 RIN price by 1.5.

That being said, the state of the BTC is a major factor in determining the current D4 RIN price. Due to uncertainty surrounding the future of the BTC, D4 RIN pricing is extremely volatile. The market currently assumes that the BTC will once again be retroactively renewed, which has helped keep RIN prices down throughout 2018.

Should You Blend?

Dunphy points out that biodiesel or renewable diesel can be blended into diesel or ultra-low sulfur diesel (ULSD) at almost any level as long as it’s used as transportation fuel, heating oil or jet fuel. The environmental benefits of blending with a renewable fuel have been explored elsewhere in this and previous issues of Oil & Energy. Thus, here we will focus instead on the potential economic benefits, looking specifically at four different ways a ULSD heating oil seller can participate in the market, followed by a few price-risk considerations to keep in mind.

1) Buy RIN-less biodiesel to blend with heating oil: It is possible for a buyer to negotiate a RIN-less price in order to buy biodiesel at a discounted rate. When this happens, the seller keeps the RIN and can potentially monetize it for its full value. Although the buyer does not get to sell or otherwise cash in on RINs, the buyer still participates in the market by receiving biodiesel at a discounted rate. However, not all sellers have the ability to sell RIN-less biodiesel.

2) Buy neat (B99-B100) biofuels with RINs to blend with heating oil: Should a ULSD heating oil marketer wish to buy and sell RINs, the marketer must be prepared to comply with all Renewable Fuel Standard regulations. Once the purchased biofuel has been blended into ULSD heating oil, the corresponding RINs can be sold into the marketplace. “Be careful, though,” Dunphy cautions. “When choosing a biofuel seller, look for a producer that is in compliance with the BQ-9000® accreditation program and participating in an RFS Quality Assurance Plan, or QAP, verification program. Make sure they are creditworthy, as well.”

3) The “small blender” option: There are about 32 companies in the U.S. registered with the EPA as small blenders. Any company that purchases no more than 250,000 gallons of biofuel per year can register as a small blender for no fee. Because small blenders cannot own RINs, all of the RIN-related responsibilities are delegated to the biofuel supplier. The small blender and the supplier must both maintain quarterly affidavits related to biofuel sales, but the supplier assumes the bulk of the regulatory compliance obligations.

4) Buy a biofuel-heating-oil blend: Of course, many biofuel sellers, particularly in the Northeast, also offer sales of blended products. The buyer typically does not receive RINs with these purchases. However, they also incur little to no administrative burden. They simply buy the blended product, then re-blend and/or resell it as desired. In this sense, the buyer is not participating in the RIN market. However, the buyer can still market the environmental and economic benefits of the blended product and pass its value on to the consumer.

Price-risk considerations: The first risk to consider is the obvious fact that RIN prices change constantly. With this in mind, buyers should also consider how long it would take to acquire enough RINs to viably sell them into the market; the lower RIN prices are, the larger the volume of a transaction will have to be. Finally, buyers should keep in mind that although RINs are tradable during the calendar year in which they are generated, as well as the next calendar year, they lose value if they are not monetized in the first year. This occurs because the refiners that are required to blend biofuels or purchase RINs to comply with the RFS can only satisfy their obligations with up to 20 percent prior-year RINs; the rest must be generated during the current calendar year.

The Bottom Line

“It’s critical for buyers to do their RIN homework,” Dunphy emphasized. “Explore all your options for what to buy and who to buy it from. And remember, too, that in addition to any financial benefit you may reap from trading RINs, blending renewable biofuels into your products is good for achieving sustainability goals, which more and more customers are looking for.”

Record voter turnouts were recorded across the country on November 6, 2018 as Americans came out like never before to participate in a mid-term election. While many election forecasters correctly predicted a “Blue Wave” of Democratic incumbents and candidates would take control of the U.S. House of Representatives, as well as numerous state governments, this wave was partially stemmed by Republican gains in the Senate and deeper entrenchment in the state legislatures of formerly “Purple” Midwest states such as Ohio. Below is a wrap-up summarizing key results of the 2018 mid-term election along with possible implications for the deliverable fuels industry.

State Governments

The Northeast has become a deeper shade of blue. Democrats flipped the Republican governorship, the State Senate in Maine and the State House in New Hampshire. They were unsuccessful, however, in unseating Republican governors in Massachusetts, New Hampshire and Vermont. Still, Democrats gained seats in almost all state legislatures, including chambers where they remain in the minority, such as the Pennsylvania House and Senate. In the Northeast, Democrats now hold the governorship and both legislative chambers (complete control of government) in Connecticut, Maine, New Jersey, New York, and Rhode Island. Divided governments remain in Massachusetts, New Hampshire, Pennsylvania and Vermont.

The preceding list outlines party-control for governors and state legislatures in the Northeast. For the state legislatures, total seats with projected net gains (or losses) are provided, followed by total seats in the chamber.

U.S. House of Representatives

Democrats won the majority with a net gain of at least 32 seats for a total of 227, or a 10-seat majority. As of press time, another nine races remain undecided, including several in the Northeast. Democrat Andy Kim leads incumbent Republican Rep. Tom MacArthur 49.9-48.8% in NJ-03; and Democrat Anthony Brindisi leads Republican Rep. Claudia Tenney 50.3-49.7% in NY-22. An instant “second choice” run-off will ultimately decide the race between incumbent Republican Rep. Bruce Poliquin and Democrat Jared Golden in ME-02. In the end, Democrats are expected to pick up between three and five additional seats.

The Democratic victory in the House will shift power and influence away from “red” districts in the South and Midwest to the “blue” East and West Coasts. Several Northeast members will be elevated to chairmanships of Committees and Subcommittees. Congressman Richie Neal of Massachusetts, for example, is likely to be Chairman of the powerful House Ways & Means Committee. Rep. Frank Pallone of New Jersey is also in line to chair the House Energy & Commerce Committee.

U.S. Senate

Republicans retained control of the chamber with at least 51 seats, equal to its current majority. They were able to flip Indiana, North Dakota and Missouri but lost Nevada and Arizona. As this publication went to print, Republican Cindy Hyde-Smith was almost certain to win a November 27 runoff election required for the Senate race in Mississippi. Likewise, a contentious recount was ongoing in Florida, where Republican Rick Scott is favored over incumbent Democrat Bill Nelson. Considering this, Republicans are likely to start the next Congress with a net gain of two seats. The filibuster is still in place for legislation, which will require 60 votes for passage. Despite the larger majority, Republicans will still require Democratic votes to pass most legislation. Executive and judicial nominations will require a simple majority, however, and will be easier to pass.

Impact on Industry Issues

In the states, Democrats are likely to use their new (or larger) majorities to advance a bold progressive agenda. This may include carbon tax proposals, electrification initiatives, gasoline and diesel fuel tax increases, targeted truck tolling, marijuana legalization, mandatory leave, and minimum wage increases. NEFI remains committed to working with state and local industry associations as they fight back against policies that aim to make your business and the broader industry less competitive.

The new 116th Congress is likely to take up several issues important to the home heating industry. This includes a rewrite of the Renewable Fuel Standard and other federal biofuels policies, as well as a highway infrastructure bill that could increase motor fuel excise taxes and other costs on fuel delivery businesses. Other legislative issues that could find bipartisan agreement include workforce development and apprenticeship programs, immigration reform, changes to Obamacare and other healthcare laws, and targeted energy and highway safety legislation. Of course, NEFI will continue to push hard for reauthorization of the National Oilheat Research Alliance (NORA) and an extension of the biodiesel and propane autogas tax credits, all of which are top priorities for the home heating industry.

NEFI will vigorously engage these issues on your behalf, but we need your help! Our success is only possible thanks to generous contributions to our advocacy fund. If your business has not yet contributed, there is still time! Visit nefi.com/donate to donate online, download a contribution form, or view a list of current donors.

Imagine you are the shopkeeper of a local hardware store in the 1980s. (I’d go back further, but I’m afraid that would leave our millennial readers in the dust.) One Saturday afternoon, a guy comes in to pick up some nails — except you know the guy by name, it’s Frank, and though he doesn’t say exactly which length, you strongly suspect he’s asking for 16-penny nails, because last week he was in here telling you about his plans to put in a backyard deck.

While fetching Frank his 16ds, you ask how the new flusher’s holding up on his recent basement bathroom reno (the project that brought him into your shop last week). “Working perfect,” he says, “thanks!” That reminds him, though: he ought to put a new plunger down there anyway. And while he’s here, the wife had said something about switching out the hardware on the upstairs vanity.

Without really even trying, you just upsold Frank, significantly padding the total sale and your profit on the transaction. Best of all, it’s not as if you had to be aggressive in your sales tactics. There was barely even a pitch! Frank and his wife did most of the work. You just asked the right question at the right time. And you were able to do so because of how you run your business. You keep a close relationship with each of your core customers, which enables you to speak directly to their individual needs.

Of course, the tragedy of the local hardware store is that despite its glowing reputation and great customer relations, most simply couldn’t compete with the big-box chains like The Home Depot and Harbor Freight Tools.

Then again, what goes around comes around.

Many of today’s small-business boutiques are fighting back against the big-box retailers — and actually winning the fight — by pushing the traditional customer-service-oriented business model into the 21st century with digital solutions like consumer apps and automated personalized marketing.

A record store on Long Island brings the old hole-punch loyalty card online using social media tagging. A thrifter in Minneapolis finds the perfect end table in an internet search advertisement placed by the antique store whose website she was just browsing minutes earlier. A fuel delivery company in Massachusetts uses a consumer app to help accelerate service plan and other contract enrollments.

The things that set your small to mid-size business apart from the national competition continue to hold water, especially for a new generation of consumers who expect businesses to intuit their needs and streamline their transactions.

Frank, the DIYer, is 65 years old now, and though the hardware store where he used to spend his weekends is long gone, he finds himself bugging the greeters at the big-box store that bought out his old haunt. But they can’t offer the personal attention you can. In fact, it’s exactly what he’s been missing from virtually all service providers lately. Automated marketing and customized apps level the playing field, empowering you to satisfy consumer demand for both click-to-order convenience and brick-and-mortar personalization.

“Personalize” Your Marketing Solutions

Obviously, there are a number of differences between running a hardware store in the 1980s and a home comfort business in the 2010s. However, I use this example, because it so perfectly embodies the spirit of the old brick-and-mortar business model and so perfectly translates how old-school customer service lends itself to today’s personalized marketing solutions. (Indeed, one wonders whether the local hardware store would still be around if some of these “tools” were available back then.)

While you might not have a service station where customers can come and fill up their propane tanks, or a showroom where they can check out the latest oil-condensing boiler technology, you do most likely have decades of experience in customer service. You probably already have someone on your team who knows, for example, that if Mrs. Grant on Fulton Street isn’t given that seasonal reminder, she’s not going to have her system inspected this year.

Now imagine how great of a heating season you’d have if every employee in your customer service and sales department knew every one of your customers this well and was able to predict their needs accordingly. That’s the kind of “virtual omniscience” today’s automated personalized marketing helps you achieve.

A recently picked up customer who’s been shopping around heating oil prices for the season finds a search display advertisement from your company that can help them lock in a lower price through one of your contract programs. A longtime customer who, like clockwork, has been placing online requests for heating system repairs every eight months gets an in-portal reminder to sign up for a service plan. A prospect in your expanded service area gets an email alerting them that there’s a new full-service fuel dealer in town.

Big-box retailers like CVS and Amazon have already made automated personalized marketing a cornerstone of their businesses: e.g., the coupons included on that ridiculously long receipt you get when you go through the self check-out aisle at CVS, or the “creepily” accurate gift recommendations you saw when you logged on to your Amazon account to start your holiday shopping.

Of course, the big difference here is that CVS, Amazon and the other big companies can’t consistently back up their personalized marketing with real-life quality customer service interactions the way your company can and does every heating season.

Another key differentiator is your expertise. The new mom or dad on the CVS line knows she or he is going to need to buy diapers again soon. It doesn’t take much of an algorithm to figure that one out! So, while the diaper coupon is valuable to this customer, it’s not necessarily going to make a huge impression. On the other hand, not every customer of yours knows when it’s time for a system tune-up, or what the advantages of one are. Automated personalized marketing helps position your company as the customer’s full-service energy and comfort expert.

“Mobilize” Your Customer Experience

According to one recent survey, 72% of consumers think mobile apps make shopping easier. Another survey says 89% of retailers plan to give their store associates mobile solutions over the next three years. A third finds that 58% of millennials use mobile apps more often than the mobile web.

“But, wait, I don’t even have an app!”

Well, don’t worry … yet. Most heating oil and propane dealers don’t have them … yet. However, as was the case with websites and later social media pages and then responsive websites, most dealers didn’t have them until they started to see their competitors getting out in front of them, at which point they too realized that they needed to get on board. Like all technological innovations, the need to adopt home comfort customer apps will be driven by consumer demand. Likewise, it is the early adopters who stand to reap the biggest rewards from investing in this technology.

The app is branded so that the dealer’s name, logo and tagline appear throughout. And like all major apps, it is available for a dealer’s customers to download via Google Play and the Apple App Store. It is supported by a wide range of iOS and Android mobile devices and integrates smoothly with most energy retailers’ enterprise software for a seamless transition between back- and front-end operations.

The app also features full integration with inVue customer account management and LeadPro lead tracking software, two of the primary engines for fuel delivery companies’ data collection and personalized marketing efforts. This makes the app a perfect companion for your existing automated marketing campaign, or a great place to get one off the ground.

PriMedia’s in-house team of developers provides all maintenance, updates and tech support, so you don’t have to worry about going through a third-party tech company that doesn’t understand your business. Instead, you’ll deal directly with a team that focuses 100% of its time on making energy marketers like you more profitable.

The Main Street home comfort provider is one of the few, if not the only remaining business in which old-school, brick-and-mortar-style customer service is a given. Your company has continued to grow and thrive not in spite of, but because of, this fact. Personalized marketing and a mobile app simply enhance your existing service advantages, giving you another important leg up on the competition.

PriMedia has been providing fuel dealers with integrated marketing communications and innovative technology solutions since 1993. To schedule a free demo or consultation, call 1-800-896-3342 or contact us online at goprimedia.com.

The U.S. biodiesel and renewable diesel market has grown tremendously from 2007 to 2017. According to the EPA Moderated Transaction System (EMTS), 2.65 billion gallons were purchased in 2017, up from just 450 million in 2007. Of these 2.65 billion, just 816 million were from imported fuel; the rest is domestically produced.

Biodiesel has expanded and diversified its production capacity over the past decade, with major interstate railroads and new biodiesel plants allowing for production to grow outside of the Midwest. Whereas soybean production continues to dominate biodiesel production in the Midwest, the industry’s new production capacity is driven in part by other markets, including on the East, West and Gulf Coasts, where producers use diversified feedstocks.

The six EPA-approved biodiesel and renewable diesel production feedstocks are soybean oil, yellow grease, distillers corn oil, animal fats, canola oil and camelina. As of September 2017, their respective slices of the biomass-based diesel pie were approximately 46%, 15%, 15%, 13%, 11% and < 1%. Though camelina provides an EPA-approved pathway, it has limited commercial use. The following is an overview of the five major biomass-based diesel production feedstocks.

Soybean Oil

Soybean production for September 2018 was forecast at a record 4.69 billion bushels, with yields expected to average a record high 52.8 bushels per acre. Soybean yields have continued to land above trend lines over the past five years, a significant development that points to increasing private equity investment in yield technology. All told, projected ending stocks for the current marketing year are 450 million bushels greater than ending stocks last year. Notably, this equates to a potential 675 million gallons of additional biodiesel from the oil in these additional beans alone.

Yellow Grease

LMC International projects that the global waste oil supply will grow from 29.0 million metric tons in 2017 to 31.9 million metric tons in 2020. These 31.9 million metric tons would be enough to create 9.6 billion gallons of biomass-based diesel. However, or perhaps to the benefit of non-food industries, the changing consumer demand for vegetarian-fed meat has decreased feed demand for yellow grease and used cooking oil (UCO), and this trend is forecasted to continue.

Distillers Corn Oil (DCO)

Prior to commercialization of the biodiesel market, DCO was not generated in significant quantities. DCO output saw rapid growth between 2010 and 2017, as most ethanol plants invested in extraction capacity, and improvements in technology increased yields. LMC International estimates output reached almost 4 billion pounds in 2017 and is expected to exceed 4.4 billion pounds in 2018, which could provide over 500 million gallons of biodiesel.

Animal Fats

USDA’s Economic Research Service reports that the pork industry has been setting quarterly inventory records almost since 2015. This trend exists for the beef and poultry industry as well. Animal fat supplies are directly correlated with meat production and U.S. processing capabilities. Longer term, the National Renderers Association projects rendered fat supplies, which includes both animal fats and used cooking oil, to increase by 14% over the next decade.

Canola Oil

Lastly, canola oil also continues to be an important feedstock for biodiesel production. Recent years have shown some expansion of canola-dedicated acreage in the Great Plains region. There are currently about 2 million acres of canola-dedicated farmland in the U.S., and the U.S. Canola Association has set a goal to increase that total to more than 3.5 million acres.

Tom Santa, Santa Energy, Bridgeport, CT, has been the Chairman of the National Oilheat Research Alliance (NORA) since 2017. His term is set to expire at the end of 2018. For decades, Santa has been a strong advocate of oil heating research. He was an active participant in many Brookhaven Technology Conferences, with a particular interest in bringing a rigorous understanding of the need for good data to assess fuel quality.

When Santa took over as Chairman, NORA’s Research Laboratory in Plainview, NY was still in its infancy. With very little equipment in place, and with the well-regarded Dr. Thomas Butcher at the helm, Santa focused on ensuring the industry developed new technologies and a better understanding of the industry’s problems and potential solutions. An active, scientifically sound and well-respected lab was vital to achieve this. In addition to Dr. Butcher, a strong team needed to be put in place, preferably one consisting of young talent. Dr. Butcher was encouraged to develop and work with recent graduates and promising students from nearby Stony Brook University.

Two students stood out and, after internships under Dr. Butcher, they were added to the NORA staff.

The first is Neehad Islam, research engineer. Islam joined the lab as an intern while he was completing his graduate degree in mechanical engineering at Stony Brook University, with a specialization in the thermal sciences. Working at the lab presented an excellent opportunity for Islam to continue his education under the leadership of Dr. Butcher while contributing to the industry’s knowledge base.

Islam’s projects at NORA have included tankless coil boilers, effects of biodiesel on pump operation, a study of hybrid boiler-heat-pump control systems and combustion tests on various blends of renewable fuel.

The research on tankless coil boilers evaluated performance parameters, and how their efficiency can be improved to allow them to better compete in the market.

The industry’s push for biodiesel as an alternative, cleaner fuel has led to the investigation of the performance of fuel pumps already installed in the field. Advanced flame sensor testing was conducted to evaluate the quality of fuel cut-off in these pumps. They were then dissected for wear-and-tear analysis. Following the investigation, pump performance, combustion performance and emissions data on various biodiesel blends was compiled. This data may lead to transitioning into higher biodiesel blends in heating fuel.

“I am proud of my work at NORA, participating in an industry that strives for progress to tackle issues facing us in an ever-changing world,” said Islam. “I envision this work to aid in the search for heating systems that are less harmful to the environment while providing high-efficiency heating to homes. Of course, generating the data and making it readily available and understandable to members of the industry is a great first step, but the work only begins there. There needs to be broader discussion on the findings so that real and important change can be effected,” he explained.

Ryan Kerr is the second research engineer selected by Dr. Butcher. Kerr began working at NORA in the summer of 2017 as an intern.

After graduating from Stony Brook University with a bachelor’s degree in chemical and molecular engineering, Kerr was hired at the NORA Lab in the summer of 2018 as a full-time employee. Kerr’s focus is on fuel quality. He tests fuels collected from installations in the field that have shown evidence of fuel problems. This can help identify anomalies such as presence of water or heavy degradation of the fuel. Kerr is currently investigating if the presence of copper is an issue for oil heating systems, as copper can accelerate the oxidative degradation of certain fuels. NORA needs to assess whether, and to what degree, copper actually affects the operation of a system in the field.

Kerr is also helping NORA to expand its study of liquid biofuels, which could decrease oilheat’s greenhouse gas emissions without much change in infrastructure. Much of the focus is on studying heating oil/biodiesel blends and biodiesel alone. Additionally, NORA is investigating other, less common biofuels including Ethyl Levulinate and Renewable Diesel.

“Either or both may be a good future option for the industry, and I want to be able to provide as much information on them as possible,” offered Kerr.

Santa is proud of the team that is now assembled at the NORA laboratory and believes they will help the industry to move forward. He notes that the research conducted by NORA and Brookhaven has led to the most important improvement in the industry in his lifetime: the virtual elimination of sulfur in heating oil. Santa is confident that NORA’s work will lead to future revolutionary changes. He encourages heating oil marketers to visit the lab, see what is going on and provide even more ideas for innovation.

On July 14, 2015, the five permanent members of the United Nations Security Council (China, France, Russia, the United Kingdom and the United States) plus Germany signed the Joint Comprehensive Plan of Action (JCPOA) with Iran, known commonly as the Iran nuclear agreement. The agreement lifted U.S. sanctions against Iran that had been in place since 2010, with the passage of the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in return for a number of measures and monitoring to prevent Iran from developing nuclear weapons. Sanctions from the United Nations related to nuclear weapons development had also been in place since 2006, and the European Union banned the importation of Iranian crude oil and petroleum products in 2012.

According to Thomson Reuters data, monthly Iranian oil production approached 4 million barrels per day (mb/d) in early 2008, but fell to 3.7 mb/d by April of 2011 and then fell sharply, hitting a low of 2.61 mb/d five years ago, in October of 2013. Following the signing of the JCPOA, Iranian oil production recovered sharply, hitting a high of 3.83 mb/d last December and holding near there through April of this year. However, U.S. President Trump announced on May 8, 2018 that the United States was withdrawing from the nuclear agreement, starting the clock for U.S. sanctions against Iran to be reinstated. The first round of sanctions hit on August 7, but the sanctions against Iran’s energy sector were set to take effect on November 4. Even ahead of the implementation of these sanctions — helped by a tougher stance from Washington than in the previous regime, indicating sanctions waivers would be hard to come by if issued at all — countries began reducing imports of Iranian crude oil, and production began to fall sharply.

U.S. Secretary of State Mike Pompeo stated that the “focus is to work with countries importing Iranian crude oil to get imports as low as possible by November 4.” Thomson Reuters data for Asian customers of Iranian crude oil indicate that this effort had been quite successful as of early October. Asia Pacific is a very important market for Iran (and OPEC as a whole). OPEC data show Iranian crude oil exports to Asia and the Pacific accounted for 64% of the total 2017 volume, with the remaining 36% headed to the European market.

Asian buyers initially ramped up Iranian crude oil imports, taking advantage of their availability, with Thomson Reuters data showing some 8.51 million metric tons imported in the month of July. However, imports subsequently fell sharply, falling by nearly 40% to 5.202 million tons by September. That month, South Korean imports were eliminated, and imports by Japan were slashed to 50% of July levels. Even Chinese imports declined, with state refiner Sinopec reportedly cutting imports in half in September.

How far Iranian oil production will fall and how much of an impact that will have on the balance of the oil market remain the big questions. Brent and WTI crude futures prices strengthened significantly in the third quarter as the sanctions loomed, with Brent trading near $85 per barrel (bbl) and WTI at $75/bbl in early October. ULSD futures on NYMEX rallied from $2.1558 per gallon (g) on July 2 to $2.3772/g on October 1. Thomson Reuters data estimated Iranian oil production had already fallen by 370,000 barrels per day to average 3.45 mb/d in September. Ben Luckock, co-head of oil trading at Trafigura, said in late September that consensus for the expected decline in Iranian oil production had increased from 0.3-0.7 mb/d when sanctions were first announced to “well beyond” 1 mb/d or even as high as 1.5 mb/d. This would be consistent with output falling to near or even below 2013 levels.

In early October, Saudi Arabian Energy Minister Khalid al-Falih said Saudi Arabian output had climbed to 10.7 mb/d, up by 0.3 mb/d from the 10.4 mb/d produced in August (OPEC OMR, secondary sources), and Russia said its output increased by 0.15 mb/d in September. The two countries held a series of private meetings in September, and quietly decided to increase production. Iran spoke out against this action, saying that increases were in violation of the OPEC output agreement, and stated they did not have sufficient spare capacity to offset lost Iranian barrels. Fellow OPEC member Nigeria has also expressed doubts about available spare capacity. At the same time, there is also potential for a looser supply-demand balance in the oil market given rapid expected growth in non-OPEC (primarily U.S.) oil production, and downside risks to global oil demand growth given emerging market weakness in the face of deteriorating Sino-U.S. trade relations.

We’ve all seen the news coverage of the devastating 2017 and 2018 hurricanes slamming into our coasts. We’ve had five major U.S. hurricanes over the past two years, and they’re certainly bigger, more intense, and more destructive.

These extreme weather events present tough resiliency challenges for the electricity industry. Work needs to be done to harden the grid.

Climate experts agree that resilience is becoming much more important to year-round utility planning and operations. It puts utilities under pressure to develop effective strategies that get residents on with their lives and businesses back to work.

Why Build Resilience?

It’s generally agreed that extreme weather events will be more severe as the planet warms. A 2016 Department of Energy report prepared by members of six national labs warns that: “Climate change poses long-term challenges by changing the frequency, intensity, and duration of the weather events that represent the largest source of disruptions to the US electricity grid.”
The report talks about the concept of resilience by addressing risk management:

Robustness – The ability to absorb shocks and continue operation.

Resourcefulness – The ability to skillfully manage a crisis as it unfolds.

Rapid recovery – The ability to get services back as quickly as possible.

There is an emphasis in the report on learning from experience so that the system becomes more robust over time.

To get ahead of storms and prepare communities for fast recovery in the most effective way possible, investment must be made early in infrastructure.

A single strategy or improvement won’t make your grid more resilient — it’s combining several improvements together to make it work. Utilities say it’s a holistic approach, building on a range of technologies and grid-management practices.

What Does Resilience Look Like?

Let’s start with a smart grid. A smart grid is an electrical grid that includes a variety of operational and energy measures, including smart meters, smart appliances, renewable energy resources, and energy efficient resources. Smart grid technology can automatically detect, isolate and reroute power when a problem occurs. This helps reduce the number of outages, decrease the duration of outages and can even help restore power in a matter of minutes.

Most extreme weather outages come from transmission and distribution problems, not generation issues. It’s the poles and wires that need to be fixed. Transmission and distribution networks are vulnerable to storm damage and will benefit from hardening measures. Undergrounding wire is expensive, but can substantially increase system reliability and resilience to extreme weather.

Resilience looks a little different. A microgrid is a localized group of electricity sources and loads (usually solar and batteries) that normally operate connected to the grid, but can also decouple to “island mode” to power critical infrastructure in emergencies.
Microgrids take advantage of wind, solar and batteries to harden a system, because they’re modular energy sources and can supply power from shorter distances, with less reliance on wires. Solar and wind also don’t rely on access to fuel and can often generate power immediately after a storm, providing resilience that other electricity sources do not.

We can now look back over two major hurricane seasons and judge how effective the grids’ resiliency strategies played out through these extreme storms.

Hurricane Irma

Hurricane Irma was a vast storm impacting 27,000 square miles of the Florida Power & Light (FPL) service area. “While this is the worst storm our company has faced,” says Eric Silagy, FPL’s president and CEO, “rest assured we were ready, having pre-positioned the largest restoration workforce not just in our company’s history but in U.S. history.” At the height of the restoration work, FPL had 24,000 personnel involved, including 11,000 of its own employees and 13,000 workers from contracting companies and utilities across the nation and even Canada.

The success of FPL’s disaster recovery strategy grew from the experience it gained following Hurricane Wilma in 2005. FLP has since invested nearly $3 billion in making its energy systems “smarter, stronger, and more storm-resilient.”

FPL hardened more than 700 main power lines that serve critical facilities and services. It also cleared 150,000 miles of power lines of vegetation that could cause power outages; established a plan to inspect, upgrade and replace the company’s power poles; and installed nearly 5 million smart meters and 66,000 intelligent devices to deal with power outages when they happen.

In advance of Hurricane Irma’s approach, FPL took the precaution of shutting down its two nuclear power plants. The utility also planned to power down some of natural gas plants in the path of the storm to mitigate damage and enable FPL to bring sites online faster after the storm.

About 4.4 million people lost power as a result of Hurricane Irma, but within 16 days of its landfall, FPL was able to restore power to all of them, with only a few exceptions.

Hurricane Harvey

Hurricane Harvey was the most powerful weather system to impact Texas and Louisiana since Hurricane Katrina. It left around a 250,000 customers without power. Despite catastrophic flooding, most had their power restored within days.

Hurricane Maria

In Puerto Rico after Hurricane Maria, federal recovery arrived at a painfully slow pace. Private companies stepped up and deployed storage systems and solar arrays. Rapid recovery is something private companies tend to do much better than governments.

Hurricane Florence

When Hurricane Florence parked over Duke Energy’s service territory, the utility leveraged improvements in mobile communications and data analysis for remote switching to reconnect their customers quickly.

Duke has a “Smart-Thinking Grid” plan that aims to reduce customers impacted by outages by up to 75 percent. According to the utility, portions of the plan already in place helped avoid over 80,000 extended outages during Florence.

In advance of that storm, Duke shut down one nuclear plant to protect it from high winds. Unfortunately, there were nine Duke substations that flooded during the storm. The wind farms in North Carolina escaped the highest winds of the hurricane and continued producing electricity throughout the storm.

After Florence passed, Duke reported that most of its solar came online quickly, although four of its utility-owned facilities remained offline for weeks afterward. Only one was because of damage, and the other three remained offline due to substation interconnection issues.

Considering the high winds in recent storms, solar systems fared relatively well, but the industry has highlighted a few potential improvements it would like to make.

Duke is investing in battery technologies and research to store energy from a diversified energy mix and dispatch clean energy where it’s needed. The utility is also considering microgrids as a solution to avoid building transmission and distribution lines in certain areas. The utility experienced over 1 million outages in North and South Carolina.

Hurricane Michael

Just weeks later, Hurricane Michael became the strongest hurricane on record to hit the Florida panhandle. Outages from Michael impacted over 1 million customers in the Carolinas, and over 75,000 in Florida.

Finding the Political Will

Resilience has become a big concern among policymakers, but it is largely overshadowed by the president’s position on climate change. Many local and state governments have taken active steps to tackle their resiliency issues on their own.

Diversification is not a new concept in the fuel oil and propane industry. Many — if not most — energy retailers have long ago moved beyond offering just fuel delivery. The reasons are many, including having a “backup” revenue source, maintaining a revenue stream during the summer months, and giving the company the ability to retain employees on a year-round basis (an even more important consideration given the difficult hiring market we currently face).

Offering the installation and servicing of heating equipment is perhaps the most common form of diversifying. But fuel oil dealers who start selling propane, and propane dealers who add fuel oil to their product line demonstrate a frequent form of extension. Other service offerings such as electricity, plumbing, snow plowing, air conditioning, landscaping, sales of diesel fuel and kerosene, water filtration systems — even servicing (gasp!) natural gas equipment — have found their way into the portfolio of products and services offered by energy retailers.

The process has been slow. Looking back over the results of our energy industry survey, just 10 years ago (2007) only 10% of dealers responding reported they were considering expanding their product line. By 2011 that number was up to 22%, and more than half of the dealers were installing air conditioning, while 10% offered plumbing service.

Today? Every dealer who responded to our 2018 survey reported they sell both fuel oil and propane, and every one of them installs and services air conditioning systems. Most (82%) now list plumbing as a service, and 95% service gas equipment.

Research, Plan and Prepare

There is money to be made if you diversify smartly. But there are also risks if you diversify recklessly. If you are considering expanding into another product line, be sure you have satisfactory answers to these five questions before proceeding.

1. What does your company do best? It might be tempting to get into a business which you find interesting, or one that offers lucrative profits. But it is important you do not stray too far from what you know. Most dealers focus on taking advantage of proven strengths, which generally lie in the category of home comfort services. You know how to deliver product efficiently, so it makes sense to add an alternate fuel to your company’s product mix. Customers have grown accustomed to seeing your service technicians working on a heating system, so it is not such a big leap to trust them to service an air conditioning unit. Keep it close and you stand a better chance of making your new venture profitable.

2. Do you have the resources necessary to enter a new market? Are you planning to diversify because you are desperate for a new revenue stream? Better to think twice about extending yourself beyond available resources. Diversification should be a strategic move. Adding a new product or service will likely require a significant investment in equipment, inventory, employee training, and marketing.

3. Will expanding your product line hurt existing business? “Don’t sink the boat!” is a watchword phrase in the financial industry, and it should apply to any plans you may have to diversify. Having your service technicians learn how to repair gas heating system could certainly help introduce new customers to your business. But will they be pulled away from the work they have traditionally done for heating oil customers? Don’t overextend your reach and risk losing the goodwill and reliable revenues you have worked so hard to develop.

4. Can you be competitive with your new product? It is likely that your new product or service will already be offered by someone in your market area. How will you break into the hearts and minds of customers? You may have a built-in audience in your existing customer base, but you will still need to offer something bigger, better, faster or cheaper than the competition.

5. Do you have the internal organization to support expansion? Adding a new product or service can almost be like starting an entirely new business. Do you have a team in place that can take on the additional burden? You will need to consider everything from upgrading your accounting system, to finding more storage, to training your office staff and sales people, to obtaining new certifications and licenses – and the list goes on. The last thing you want to do is launch a new service and be unable to support it internally.

Is Diversifying Worth It?

What is the bottom line on diversification? As discussed, it is not an automatic “home run.” The investment in resources —time, money and people—can be considerable. And the return on investment is not instant. In our experience even the most successful energy companies who diversify into other products and services can expect to wait five years or more to recoup their investment, if they succeed at all.

To add propane to your product line requires a typical investment of $400,000 for delivery trucks, service trucks, a storage plant, customer tanks, hiring technicians, and retraining delivery drivers. It could easily take five years to recover this initial investment. Air conditioning installation and service requires a smaller up-front investment, typically about $100,000 for inventory, parts, service trucks, and hiring technicians. But sales volume is also lower and the competition for customers can be fierce. You might expect a return on investment of approximately $200,000 after three years. Other fuel types and products require varying levels of initial investment, with similarly variable returns.

Our firm has had multiple clients expand their product lines into alternate fuels and services. The results have been mixed. Two companies decided to become suppliers of electricity, taking advantage of deregulation in the industry. One had great difficulty in getting their existing fuel oil clients to purchase electricity as well. They did not have the right personnel in place to support the operation and gave up on electricity after two years.

The other company, however, invested in creating an infrastructure for electricity sales, including training for their people. They also made a big push to contractors for new construction work, which resulted in the opportunity to install heating systems (both propane and fuel oil) and provide the home’s electricity supply at the same time. As a result, electricity has become a steady income stream for the business.

Answers

If all this seems overwhelming, it should be. Diversifying your business is a big, important step that deserves extensive up-front planning, a commitment of resources (both financial and human), and the patience to wait until your new offering gains traction with customers. Diversifying also requires a change in your management approach. With only one fuel type and a limited number of services to offer, you can find yourself managing on a day-to-day basis, focusing on details and putting out fires. When you widen your company’s portfolio, you must also widen your own horizons, taking a longer, more strategic view of the future for the business. You need to start working on the business, not in the business.

But the payoff can be worth it. Having “more legs on the stool” can create a more stable business that is more resistant to seasonal variations, the impact of supply shortages, and the changing nature of how customers address their home service needs.

Martin Kirshner, CPA, MSA is a member of the Energy Practice Group at Gray, Gray & Gray Certified Public Accountants and specializes in accounting, tax, and consulting for energy company owners. You can reach Martin by calling (781) 407-0300 or at mkirshner@gggcpas.com.

Federal lawmakers slammed executives from Columbia Gas and its parent company, NiSource, for inadequate preparation and response to the gas explosions that rocked New England’s Merrimack Valley region in September. (Editor’s Note: See “Natural Gas Disaster Racks Massachusetts,” from last issue.) The comments were made at a rare field hearing of the Senate Committee on Commerce, Science and Transportation held November 26 at the South Lawrence Middle School. Representatives from NEFI and the Massachusetts Energy Marketers Association (MEMA) were in attendance.

The hearing opened with emotional testimony from Lucianny Rondon, sister of 18-year-old Lionel Rondon, who was killed in the explosions. “The grief we feel is unbearable,” she said. More than two-dozen other individuals were injured, an estimated 30,000 residents were forced to evacuate, and more than 100 structures were damaged or destroyed in three communities. More than 1,300 customers had no heat or hot water during the coldest autumn in 80 years, and more than 8,000 people celebrated Thanksgiving in hotels or trailer parks. The original deadline for reestablishing service to affected Columbia Gas customers was November 19. That self-imposed deadline was extended to December 16, but during the hearing utility officials could not guarantee lawmakers that everyone would have service restored by then either.

“Columbia Gas should be ashamed,” said Senator Ed Markey (D-MA.), who presided over the hearing. “At every step of the process there was a chance for NiSource and Columbia to avoid this disaster,” he said. This includes simple things, such as maintaining up-to-date maps of the gas system and installing automatic shut-off valves at key points that are ready to respond to any over-pressurization. Markey said these failures left “ticking time bombs” under the streets and in homes and businesses. “Instead of choosing safety you chose savings; instead of choosing action you chose to cut corners,” he said.

Answering a question from Senator Elizabeth Warren (D-MA), Columbia Gas President Steve Bryant and NiSource CEO Joe Hamrock revealed they receive annual salaries of $550,000 and $5 million, respectively. When Rep. Niki Tsongas (D-MA03) questioned how costs of the disaster would be paid for, Hamrock suggested the utility may pass on the costs to gas customers. The total cost of the disaster could exceed $1 billion, according to experts. Sen. Markey and Rep. Seth Moulton (D-MA06) called on the two executives to resign.

The hearing also highlighted ongoing safety concerns. Thousands of miles of aging natural gas pipeline infrastructure snake across the Northeast, including 21,000 miles in Massachusetts alone. Rep. Moulton noted that 12 state inspectors (a full staff) are expected to be responsible for 1,750 miles of pipeline each, if divided evenly. That’s the entire distance between Boston, Massachusetts and Dallas, Texas.

Lawmakers and witnesses from the National Transportation Safety Board and U.S. Pipeline & Hazardous Materials Safety Administration promised new legislation and regulatory reforms at the federal level to help prevent such disasters from occurring in the future. This is in addition to actions by state and local policymakers and the utilities themselves. “No one should live in fear that their home will explode,” Sen. Maggie Hassan (D-NH) said.

Despite this, risks will always remain, and lawmakers expressed doubts about whether aging or obsolete pipelines can be replaced before another disaster occurs. Massachusetts Secretary of Energy & Environment Matthew Beaton said it could take 20 years or more to do so (likely a conservative estimate). Then, of course, there are questions as to the cost of replacing gas lines, and who will pay for it.

Senator Markey promised follow-up hearings would be held in the future. NEFI and Oil & Energy are following the debate closely and will keep readers up to date on the federal response to the Merrimack Valley Disaster, as well as the broader safety and environmental risks posed by natural gas.

“Over the next 25 years, disruption is inevitable,” said April M. Salas, Executive Director of the Revers Center for Energy with the Tuck School of Business at Dartmouth. Formerly an energy policy advisor to the White House, Salas has held various senior positions with the Department of Energy and FEMA. She started her career working on mid-/downstream oil and gas projects in Africa, has represented U.S. government energy security interests before NATO, and led projects in Columbia, Haiti, Iraq and the European Union. In short, Salas not only observes shifts in the international and domestic energy economy — she’s been involved in them.

As the keynote speaker for the Southern New England Energy Conference, Salas sought to draw audience members’ attention to transitions that are already taking place, as well as those that are set to occur in the decades to come. Natural gas is growing faster than any other fossil fuel, she said, quick to add that renewables are growing even faster. Salas acknowledged that the Paris Agreement marks a major turning point in worldwide de-carbonization, as 196 countries signed on at the end of 2015 and another 174 followed suit in 2016. And though the U.S. is expected to become energy self-sufficient by the mid-2030s, she said, consumption is predicted to remain flat as demand for oil plateaus around 2030. At the same time, however, the U.S. should see 20% growth in renewables, including biofuels whose slice of the pie is expected to grow from 5% to 25% by 2040.

Where some might hear a death knell, Salas recognizes a profitable disrupt waiting to happen. She framed the ongoing shift to green technology and renewable energy not as a “doomsday” event for the deliverable fuels industry, but rather “an opportunity for growth.” To evidence the industry’s penchant for resourcefulness and adaptability, especially in times of jeopardy, she needed to look no further than right outside the venue. New England, Salas noted, faces some of the most significant infrastructural constraints of any region. Propane, for example, is critical for home heating in areas where infrastructure is limited, but just a few firms control 35% of that market. In Rhode Island, Massachusetts, and New York, natural gas accounts for more than 50% of the heating energy supply. Despite all this, she noted, it was heating oil and diesel suppliers that helped keep the lights on throughout the Northeast this past winter.

“Fuel supply emergencies are hoped not to be the norm,” she said, “but what a difference your industry made from one season to the next.” By encouraging customers to order fuel early, Salas said, heating oil and diesel sellers were able to get a firm grasp on tertiary storage — an area where other energy sources came up short. “Your industry helps mitigate structural shortfalls,” Salas told the audience. “This is potentially a strategic advantage, and I urge you to think about ways to capitalize on it.”

After reiterating that the fuel mix is evolving globally, nationally, and regionally, Salas said, “I don’t want to insinuate that you should stop doing what you’re doing and start selling renewable energy, but I want you to think about how you position your company and industry to be involved in the evolution moving forward.”

Don’t Miss Out

Since the industrial revolution, disruptions have been occurring faster and faster with seemingly bigger, more game changing impacts each time. Salas began her overview of historic industry disruptions in the communications sector. Recalling the transition from landlines to cell phones, she noted that economists undershot mobile adoption by a factor of 120 in their forecasts. As a result, companies like AT&T missed out on an opportunity worth trillions. Years later, Bloomberg predicted that the iPhone would only appeal to gadget freaks. We all know how that turned out.

Similarly, Blockbuster once had the opportunity to purchase Netflix for $50 million. Today, there is just one Blockbuster store open in the U.S. (in Bend, Oregon of all places), and Netflix has a market value of over $150 billion.

From horse-drawn carriages and coal burners to diesel engines and oil burners, the transportation and energy industries are well accustomed to disruption, Salas said. Today, shared transportation — think Uber and Lyft — has put not just traditional taxi services, but the entire automotive industry on watch. Likewise, electric utilities have already begun to suffer declining rate bases as customers are incentivized to generate their own electricity. In fact, non-utility buyers contribute more solar and wind power to the grid than the utilities themselves, Salas noted.

Examining how these latest disruptions have impacted industries’ formerly prevailing business models, Salas found some clear patterns emerging. “Millennials are driven by a shared economy,” she said. Rather than wait for existing economies to catch up to their needs, milliennials have taken the initiative and simply created new economies. Accordingly, when it comes to the growth of these emerging economies, “change in investment will be driven from the bottom up,” Salas said. “Implementation has always been local, which has never been truer than it is today.”

Looking around at all the third-generation, full-service small-business owners in the room, it was clear where Salas was going with this. “By harnessing this generation’s confidence,” she said, “your industry is well positioned to address the challenges” of the clean-energy home and self-serve economy.

“Be trusted agents.”

To bring it all home for fuel dealers, Salas used the example of her own relationship with her home heating company — Simple Energy, of West Lebanon, New Hampshire. A heating oil and propane customer, Salas recently looked into switching to natural gas, but thought twice about it when she found out that Simple Energy also offers Bioheat® fuel made with up to 20% biodiesel sourced from local supplier White Mountain Biodiesel in North Haverhill, NH.

“The consumers of the future look a lot like me,” Salas said. “We don’t want to be inconvenienced, and we rely on you to be there when we need you.” As trusted home-comfort agents, full-service fuel dealers are situated to thrive in an evolving market characterized by transparency, cost control and smart technology, she related.

For examples of new products and services companies might immediately add to their offerings, Salas pointed to smart thermostats, tank and temperature monitors, biofuels, and turnkey solutions such as energy-demand controls.

In the long term, she looked to smart-house design, cold-climate heat pumps and battery storage as trends to watch. And in terms of bigger-picture moves that might be considered, she mentioned system design optimization for industrial-scale customers, as well as partnerships with local lawmakers, helping them to navigate rebate programs for example.

By leveraging these innovations and pivots with personalized service and strategic growth through acquisitions and partnerships, the industry’s next disruptors might emerge from this very audience, Salas said.

Following an enthusiastic response from the crowd, NEFI President & CEO Sean Cota thanked Mrs. Salas for her inspiring words and added a few of his own: “We were cutting edge when we were kerosene for lighting and oil for heating. We have the opportunity to be cutting edge now.”